Truck-related stocks have massively outperformed the broader markets this year up over 30% while the S&P 500 is up only around 7%. This outperformance has come despite abysmal Class 8 net orders which seem to just get worse each month with August 2016 net orders down over 25% compared to last year. In fact, the level of trailing 12-month net orders is the lowest since January 2011 with YoY changes now in negative territory for 18 consecutive months.
This news comes as Volkwagen just announced a $256mm investment in Navistar International and agreed to collaborate on "strategic technology" and to establish a procurement joint venture. The news pushed Navistar stock up over 40% on the day alleviating near-term investor concerns over an aggressively levered balance sheet and massive pension under-funding.
The investment in Navistar comes after its market share in heavy-duty trucks has been cut in half over the past five years on the back of a diesel emissions scandal. The scandal ultimately resulted in Navistar paying the SEC $7.5mm to settle allegations it misled investors over its ability to comply with new diesel emission standards that went into effect in 2010. Navistar had attempted to develop a proprietary solution to comply with the new 2010 regulations, rather than using the same technology as the rest of the truck and engine industry...a bet that obviously didn't work out as planned. Per Bloomberg:
Navistar sought to comply with federal engine emission rules that took effect in 2010 by using an exhaust gas recirculation (EGR) technology that funnels emissions back into the engine’s cylinders as a way of lowering the nitrogen oxide that is released. The trouble for Navistar is that the technique did not reduce the emissions sufficiently to meet the U.S. rules, which led to the company paying a penalty of nearly $2,000 per engine. Rival engine makers, such as Cummins, Paccar, and Daimler, use a system called selective catalytic reduction that applies a urea-water fluid to the exhaust gases to convert the harmful nitrogen oxide to water and nitrogen.
In July 2012, the Lisle (Ill.) company reversed its decade-long course and said it would abandon the technology in its engines. The board soon ousted CEO Dan Ustian, and two months later the company reached a deal with Cummins to supply its widely used ISX15 diesel engines for Navistar’s largest truck models. That engine also meets emissions requirements that take effect in 2014.
Luckily for Navistar, if they ever want to revive that EGR technology we hear that VW has an excellent "fix" to help meet diesel emission standards.